BORROWING

COSTS
**********
Chapter 25
Intermediate Accounting
by: Valix, Peralta, Valix

Rosario M. Perez
 DEFINITION

• PAS 23, Paragraph 5

• Borrowing costs are defined as interest and
other costs that an entity incurs in connection
with borrowing of funds.
• It includes:
1. Interest Expense
2. Finance charge
3. Exchange rate difference for foreign
currency borrowing
How are we going to record the
borrowing costs?

• If the borrowing is directly attributable to

the acquisition, construction or production
of a qualifying asset, the borrowing cost is
required to be capitalized as cost of the
asset.
• All other borrowing costs shall be
expensed as incurred.
What is Qualifying Asset?

• Is an asset that necessarily takes a

substantial period of time to get ready for
the intended use or sale.
• Examples
1. Construction of manufacturing plant
2. Power generation facility
3. Intangible assets
4. Investment Property
Excluded from capitalization

• Assets measured at fair value such as

biological assets (livestocks/poultry)
• Inventory manufactured in large quantity
on a repetitive basis (whisky)
• Assets that are ready for their intended
use or sale when acquired.
Assets Financed by specific
Borrowing

• If funds are borrowed specifically for the

purpose of acquiring a qualifying asset,
the borrowing costs to be capitalized are
the actual cost incurred less investment
income if any. Page 692
 Exercise

• The company obtained a loan specifically

for construction of building amounting to
PHP 5,000,000.00 with interest rate of 7%.
The company temporarily invested part of
the proceeds and earned an interest of
PHP 50,000.00. The building was
completed on the same year.
How much is the total cost of the building?
 Asset Financed by general
borrowing

• If funds are borrowed generally, the

amount of borrowing costs to be
capitalized is equal to:
Average carrying amount during the period x
average interest rate
However, the total borrowing costs to be
capitalized should not exceed the actual interest
incurred.
Asset financed both by specific
and general borrowing

• If the funds came from a combination of

specific and general borrowing:
1. Compute for the average carrying amount
2. General Borrowing = Average carrying
amount – specific borrowing
3. General Borrowing Cost = General
borrowing x general borrowing rate
4. Borrowing Cost = Specific + general
More than one year but less than
2 years
Specific borrowing for asset
used for general purpose

• Should be recorded or treated as general

borrowing
 Commencement of
capitalization
• The following conditions should be
present:
1. When the entity incurs expenditures for
the asset
2. When the entity incurs borrowing costs
3. When the entity undertakes activities that
are necessary to prepare the asset for
the intended use or sale
 Suspension of
capitalization
• During extended periods in which active
development is interrupted.
• Not suspended for temporary delay is a
necessary part of the process.
• Not suspended during a period when
substantial technical and administrative
work is being carried out.
Cessation of capitalization

• When the construction is complete

• When the qualifying asset is prepared for
its intended use or sale
 Disclosures

• The amount of borrowing costs capitalized

during the period.
• The capitalization rate used to determine
the amount of borrowing costs eligible for
capitalization
 Assignments

• Problem 25-1
• Problem 25-2 & 25-3
• Problem 25-4